Stephen Ward BA (Econ), ACII, APMI, APFS, AIFP

Managing Director

Premier Pension Solutions SL

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By Stephen Ward BA (Econ), ACII, APMI, APFS, AIFP - Thu 16th Dec 2010

 

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In order to surprise us just before Christmas the Government published a discussion document on December 13th titled “Early Access to Pensions Savings“. One can only imagine that this has at least in part been prompted by the far from level playing field that has arisen since QROPS were introduced back in 2006. After all, when utilising QROPS the long term non-UK resident is able to access up to 100% of his UK pension fund as a lump sum, then it surely makes sense for well controlled accessibility to be available for UK residents as well.

The main driver for the discussion document is however a commitment in the Coalition agreement to explore the subject of early access – there is no commitment to introduce it. Actually, if I were a betting man I can see this one destined for the long grass.

The HMT publication is one which seeks evidence and research from interested parties. It does not contain proposals as such but puts forward ideas for interested parties to consider and a set of questions to be answered.

Implementation of any early access is therefore a long way off, if ever. It would be hard to envisage anything happening before April 2012. The HMT document if anything sets out reasons why early access should not be introduced - for example it states that .... “early access to private pension savings may not be an effective policy to help the majority of individuals facing financial hardship.” Simply because those in financial hardship tend to have little by way of pension savings – “individuals or households with no liquid savings to fall back on in the event of hardship, or a life event requiring access to a capital lump sum, are also more likely to have limited or no pension savings”.

Four possible models for early access are presented :

1.) A loan model allowing individuals to borrow from their pension fund

2.) A permanent withdrawal model, allowing access to funds without repayment obligations – possibly in limited circumstances, such as in cases of hardship

3.) Early access to the 25 per cent tax-free lump sum currently available from age 55

4.) A feeder-fund model, creating a more flexible savings product linking liquid savings products, such as ISAs, and pension savings together into a single account

However, HMT say of the loan model “The Government is however wary of the potential complexity of incorporating a loan model into the UK pensions tax framework”.

Permanent withdrawal is considered in the context of the New Zealand model (the usual destination for permanent withdrawals for long term expats through a QROPS), but with a limitation based on proven financial hardship. Again one senses a luke warm attitude on the part of HMT - “permanent withdrawals create a potential tension within the UK’s ‘EET’ pensions tax framework”, and the issues associated for final salary schemes in particular are highlighted.

Regarding early access to the 25% lump sum, HMT are concerned that controls would need to be introduced “since the 25 per cent tax-free lump sum could be recycled into further tax-relieved pension saving”. Perish the thought !

All told therefore a reading of the discussion document leads to the possible conclusion that this has been produced primarily because of a commitment under the Coalition agreement to do so. I do not sense any great appetite for change.

However, so far as the long term expat is concerned a huge amount of flexibility is and remains available.

Some advocate that this flexibility will change (although there is no sign of it), however it would be hard on the one hand for HMT to be looking (albeit with limited enthusiasm) at the possibility of earlier access to pension funds for UK residents if at the same time there were changes to the QROPS rules which went in the opposite direction.

The Pensions Reciprocation Plan (PRP) however gives this greater flexibility and it delivers it now. But not through early access to the members own fund. The PRP instead is focussed on maximising the value of the members pension rights (current and future) whilst at the same time allowing the member through pensions reciprocation to avail himself of a lump sum.